The Battle of Harrisburg: Bankruptcy or Budget Cuts?

By

Michael Aneiro

Updated June 27, 2011 2:59 p.m. ET

With state, county and city officials at loggerheads over how to save Harrisburg, Pa., from a $300 million debt burden, residents of the state capital will have an opportunity to grill elected officials about their options at a public hearing Tuesday evening.

The discussion will likely center on whether the city would be better off filing for Chapter 9 bankruptcy protection or pursuing other alternatives to address the large debt linked to a failed incinerator project whose funding the city guaranteed.

The meeting comes as the state, county and city continue to fight over how to deal with Harrisburg's debt burden. Some city council members have threatened to declare bankruptcy rather than make drastic cuts recommended by a state oversight agency, while the state is threatening to take over the city's finances. Meanwhile, the city and its surrounding county remain pitted against one another in a lawsuit.

In recommending budget cuts two weeks ago, the state said that its capital city faces an "immediate and grave" crisis, adding that failure to find a solution will "produce catastrophic results for the city" and "damage the reputation of the Keystone State at a national level should its capital city be forced into bankruptcy."

Last Tuesday, however, the Harrisburg City Council approved by a 4-3 vote Councilman Brad Koplinski's recommendation to begin preparing paperwork in case of a bankruptcy filing.

The following day, a Pennsylvania state senate committee countered by approving a bill that would forbid cities like Harrisburg from filing for bankruptcy, while also calling for state takeover of Harrisburg. The full state senate will now consider the bill.

"It seems like the state is moving very fast to try to limit Harrisburg's options," said Harrisburg Controller Daniel Miller. "There's somewhat of a thought that maybe the city should file for bankruptcy before the state takes away that option."

A bankruptcy filing would give Harrisburg court-ordered protection from its creditors while it seeks solutions to its financial crisis. But such a filing would likely impose significant losses on bondholders.

That could have ripple effects on the state's credit rating and the broader municipal-bond market, potentially raising borrowing rates for Pennsylvania and making it difficult for Harrisburg to eventually access capital markets again.

The state's Department of Community and Economic Development issued its 418-page Act 47 plan on June 13, recommending the sale of the incinerator facility to the Lancaster County Solid Waste Management Authority as well as the sale or lease of assets of the Harrisburg Parking Authority. Pennsylvania established Act 47 to aid distressed municipalities.

The report projected Harrisburg would run out of cash to pay bills and payroll by the fourth quarter of this year. It cited a $2 million structural deficit in the city's 2010 operational budget, which it said will grow to $3.4 million in 2011 and top $10 million by 2015.

After Tuesday's hearing, Harrisburg's city council will have 25 days to act on the plan.

Earlier this month, the Commonwealth Court of Pennsylvania reinstated a lawsuit brought by Dauphin County, where Harrisburg is located, seeking to force Harrisburg to pay the county $34.7 million in money owed on the incinerator bonds. The case had been dismissed by a lower court.

In March, after being enlisted by Harrisburg, the New York law firm Cravath, Swaine & Moore delivered a report saying a consensual resolution between Harrisburg and its creditors would be faster, less expensive and provide greater certainty than a Chapter 9 case.

Last Thursday, Debt Watch Harrisburg, an independent organization, convened a separate public forum to discuss the Act 47 plan. Also last week, Harrisburg Mayor Linda Thompson, who opposes the idea of a bankruptcy filing, joined local religious leaders for three days of fasting and prayer to promote a spirit of cooperation in hopes of solving the city's financial woes.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.